The U.S. is taking big steps toward helping the country come out of the novel coronavirus pandemic crisis. The government is sparing no expense – almost to a fault. There’s just too much money going into a very tight system. Therefore, the stock market should continue to have a tailwind this year. In such environments, finding momentum stocks to buy on dips makes sense.
Today we will discuss three such opportunities going into the summer. These are fast-moving equities, which makes them dangerous. Add to this that the indices just made new all-time highs, and it makes for a vulnerable situation. Even though there are no systemic problems, corrections can pop out of nowhere.
The way the S&P 500 broke out recently left big gaps below. These are weak points and the bulls need to go back to solidify the base. Otherwise, the rally from here would be very precarious and fraught with danger. The higher the markets go without revisiting the neckline, the harder the fall will be and with more pain. This is especially important for today’s picks because they are momentum stocks and they run fast under normal circumstances. If the markets correct, they will be running lower much faster pace.
Fundamentally, they tend to have skeptics, which could add fuel to the fire. However, the assumption is that in a rising stock market, these momentum stocks will have an advantage. This is truly a double-edge sword scenario, therefore investors should establish very specific stop-loss levels. Leaving things to chance is reckless. Successful traders always have a plan in and out of their positions. Doing so with momentum stocks is paramount. Today’s picks are:
The pandemic disrupted our lives completely. This also helped our three picks today, but the advantages are likely to linger.
Momentum Stocks to Buy: Etsy (ETSY)
Etsy is an online marketplace that empowers creativity. This became really a important service during the pandemic. People were out of a job and needed other means to create income. The Etsy platform offered an easy outlet for that. You can see this in their results because the growth has been phenomenal.
Usually momentum this strong carries a long while. This is how Amazon (NASDAQ:AMZN) became the giant that it is now. The fundamental metrics are also sane. These are not speculative electric vehicle stocks looking for an income stream. Etsy stock currently already has value. It is not cheap, but with a price-to-sales of 17 it can definitely grow into it quickly.
Technically, the stock is 20% below its highs. More importantly, it’s hovering above recent support. The November rally ended abruptly, and the stock has given back about half. That is normal price action, not a sign of weakness. Sideways to slightly down consolidation builds strong foundations for more upside. I expect the buyers to come back into this stock. Therefore, Etsy can have a rally through the end of the year. As long as it holds above $185 per share, I expect it to break out from $210 per share into new highs.
This qualifies as a momentum trade, but can turn into an investment. Management is executing well on plans and the scorecards prove it. They doubled income total revenues in a year. More importantly, the low P/S being reasonable means that owners are realistic with their expectations. It is unlikely that they will throw a big fit as long as the earnings reports stay healthy. I don’t always suggest buying it, but on pullbacks it makes sense.
Overstock (OSTK)
Our second pick today is overstock.com. This also is a online retailer but closer to the traditional kind. They have stepped up their market efforts as I find myself landing there through click-troughs from various sources. OSTK also benefited from the pandemic. In fact, OSTK stock was less than $3 before the virus broke out.
What followed was a massive rally that did not abate until it had already gone 4,000%. It is now 50% below that but with strong support below. My bet is that the fans of the stock will defend the zone below. But if they fail, I would worry if OSTK stock falls below $58 per share. This could trigger a bearish pattern to target the low 40s. This is not my forecast but it is a scenario that exists. Also, helping it is another layer of support at $50 per share.
Depending on the time frame, investors can start longs here in anticipation of a rally back toward $80. But if the selling persists there would be an opportunity to add if the bearish pattern triggers. I’ve had success timing entries like this past November. But there isn’t a one-size-fits-all strategy.
The fundamental metrics are also attractive. Total revenue grew 70% from 2019. This is evidence that it’s definitely getting a tailwind from the virus aftermath. OSTK is the cheapest of the three stocks today. Even though the P/E is 56, its price-to-sales is barely above 1. There isn’t much hopium in the stock price today.
Valuation is not going to lend it much support especially if the whole market corrects. But it’s good to know that investors are not grossly overpaying up front for it. This also is a swing-trade opportunity that could turn into a long-term investment.
DraftKings (DKNG)
Sports are a popular pastime but they have suffered a sever disruption for over a year. The events are coming back online and that process should accelerate after the vaccinations. The DraftKings opportunity grows exponentially when that happens. Online sports betting is hot and getting hotter. On March 22, when the stock made highs I suggested to wait for an entry near $60. Here it is.
Furthermore, states are changing their stance on that, partly because of the lock-downs last year. The future looks bright, and so far the DKNG profit-and-loss statement support that thesis. In its young career, revenues went from $71 million in Q2 of last year, to $322 million in the most recent quarter. This is exponential growth, so the fact that its price-to-sales is 47 is not a concern. At this rate they can quickly grow into this big valuation.
Besides, building a growth business on a budget doesn’t work. Investors who insist on it being cheap should pass on this and all other growth stocks. Skeptics doubted Amazon’s ability to follow through but it proved them all wrong. These are blueprints that DraftKings can follow for success.
Technically, the stock corrected sharply from the March highs and bounced hard from $57 per share. I expect that support zone to hold going forward. This should serve as a base to set new highs by the end of the year. However, if for whatever reason the support fails, it could revisit $52 per share.
Either case, it’s a good entry here, and it’s a much better entry closer to 50. The thesis remains the same, this stock should recover and make new all-time highs in the next few months. The sharp drop happened because of headlines, but these are transients. There’s nothing systemically wrong with how the company operates.
Before closing, I would like to remind a readers that this is not a typical stock market. There are a lot of artificial things messing with it. The government is going to extreme lengths to prop the economy up. In the process they have broken how a few things intertwine. This is all to say that we should expect the unexpected. Therefore, investors should take partial risk to leave room for error. Even the best of stocks will fall to no fault of their own sometimes.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
